We all know that part of smart financial behavior is to get into the habit of saving a portion of your earnings. The “rule of thumb” for savings is 10% of gross income. Many save for a “rainy day,” or “nothing in particular” rather than towards any specific goal or focus.
Everyone has different goals, dreams and obligations. When you are establishing the habit of saving, having a particular goal makes it a lot easier.
Related: How much of your income should you save?
Here are some potentially costly things we should get into the habit of saving for.
Unexpected expenses (aka the emergency fund)
Again, the handy rule of thumb suggests putting aside three to six months of expenses, but the amount really should be determined by what you feel comfortable with, as well as other resources you may have.
Periods of unemployment can be a lot less stressful when you’re looking for a new job and you won’t be tempted to settle for something undesirable just because you need the money.
Stuff happens. Things break. Unexpected events occur. If you’re just starting an emergency fund, even as little as $1000 would cover a lot of unexpected expenses.
A contingency fund is used for planned expenses such as future repairs or improvements to your home, car, or other possessions.
Related: 30 signs you grew up in a frugal family
Large purchases
This category includes saving for a down payment on a house, or a new vehicle. Your negotiating power may go a lot further when you have a significant down payment, or pay cash for a car.
Luxuries
One reason to save money is to have fun. When you save up for that dream vacation you won’t be still paying for the trip two or three years down the road. The anticipation when saving for a large ticket items such as a boat, or even a PlayStation, will make you appreciate them a lot more.
Education
Saving for education, whether your own or your child’s, can save years of future debt payments. With an RESP you get the added bonus of the government grant that matches 20% of your contributions to an annual, and lifetime, maximum. Once you’ve maxed out the grants, you can save additional money in your TFSA for more flexibility.
Related: 35 ways to save money
Retirement
The latest common advice is to put off retirement savings until debts, including a mortgage, are paid. The thinking is that when you are young you don’t earn much and you have a lot of expenses when you’re just starting out.
In my opinion you should be thinking ahead no matter how young you are. The sooner you start, the sooner you will be taking advantage of long-term compounding, and the less you will have to save in the future. Time is your best friend when it comes to long-term investing.
Related: The best time to start saving is now
At the very least you should set aside the percentage of your pay that reaps the maximum payout if your employer matches your contributions. You should never walk away from this money.
Conclusion
It can be difficult to prioritize your savings resources, especially if your expenses are high and available funds are limited. Having clear goals makes you more successful.
What motivates you to save?
